The week has started with a bit of a bang, as the Barron's cover story arguing for a Fed rate hike sent equity longs and dollar shorts scurrying for cover. Well, for a couple of hours at least; after the initial flurry, both equities and non-dollar currencies saw solid demand and are, at the time of writing, solidly up on the day.

The Barron's article contrasts starkly with views expressed in the weekend press by Adam Posen, newest member of the BOE MPC (and, as it so happens, a former colleague of one Benjamin S. Bernanke) arguing if favour of more, not less, QE.

We are now entering treacherous waters for monetary authorities in highly-leveraged economies. Given the decade(s)-long dependence on the credit mechanism to spur economic growth, the financial crisis has brought about a precipitous decline in the velocity of money- i.e., how much economic activity is generated per unit of money supply. Bloomberg helpfully calculates a velocity indicator; as you can see, while recent fall has been steep, velocity never really recovered from the heady day's of the 90's productivity boom (and..err....internet bubble.)
If the average or median citizen feels like they never really participated in the Noughties recovery, this is perhaps an indication of why. Q3 data, to be released towards the end of next week, will probably show a very modest uptick in velocity (presuming a small positive growth reading for nominal GDP in a quarter when M2 was broadly stable.)

Given the damage inflicted on Main Street by this recession, the Fed will almost certainly want to see what looks to be a sustained uptick in the "economic" velocity of money before meaningfully tightening the taps; after all, we know that Big Ben is a student of the Depression and of the policy mistakes that occured in the 30's.

So what's the problem? Well, the challenge for the Federals is that there are some areas where velocity has picked up- namely, financial markets.